Dear friends, I want to attract attention to the changing economic situation worldwide - before COVID-19 crisis 50 % of debt to Gross Domestic Product was a high public debt for many countries, but nowadays, during coronavirus crisis, and I think, for some time after it, 50 % of country's debt risk can be considered as rather low.

It depends on a lot of different variables: such as the output gap in producing industries (specifically unemployment rate), the real interest rate on government bonds, the export tendency and so on. It depends, above all, on feed-back effects among all these variables. For instance if a country is experiencing a severe recession with an high unemployment rate it could face an increase in government deficit and in government debt due to an increasing of unemployment subsidies and to a decrease in fiscal revenues. A possible policy, to counteract this, may be a restrictive monetary and fiscal policy to reduce the internal demand (and salaries) and to incentivize exportations. This kind of policy may increase the GDP and so reduce the unemployment and augment the fiscal revenues. This finally may reduce the fiscal unbalances. Unfortunately this kind of policies may carried out only by small countries (by a demographic point of view) with a strong export tendency towards a near big economy. In the recent past this policies were applied successfully by Canada and Ireland for instance. Finally this kind of policy cannot be applied by all countries simultaneously. A more reliable policy is to spur the internal demand by means of a program of public investment even financed by an increase of deficit. This program may be repaid by the greater fiscal revenues due to an increased GDP (Keynesian multiplier). In this case if there is, in the first place, the increase of the debt/GDP ratio over the 50 per cent it’ll be not a problem if the economic growth will make it decrease in the following period. In general the cross a threshold (nevertheless defined) of debt to GDP ratio is not a problem if it is in favor of economic growth, i.e. if it increases the spending capacity of the households. Obviously a complete model have to take in account also the possible inflation tensions that may occur if the output gap is near to zero, in this case an increase in indebtedness may cause the rise of price and of interest rate paid on debt. The presence of an active attitude of central bank in managing both the monetary policy to prevent inflationary pressures and to keep the real interest rates on bonds down, is another important element to judge the risk of indebtedness of a country.

I think that the question is misleading. Debt (either public or private) should be regarded as an input required by the technology adopted, like iron or energy. Thus its weight on the final product is almost a technical and organizational issue. For instance, let us consider a very primitive agricultural industry, where seeds, fertilizers, and the wage of workers must be fully anticipated before the harvest. There the debt to output ratio approaches 100%, depending on the profit rate. The same happens for the production of public services that requires also the anticipation of wages and raw materials. Since the profit rate is arguably null for the public sector, then what matters is only the flow of public revenues and expenditure during the year, your than the amortization of capital. Thus a common "safe" debt to GDP ratio is almost meaningless and less effective.

Hello Mr. Dariusz Prokopowicz

I strongly believe that the Public Debt to GDP ratio maximum limit of 50% is arbitrary , thus cannot be used as a guideline for countries to follow in order to be fiscally sound. As a matter of fact which public debt to GDP ratio is appropriate, it all depends on the idiosyncratic structure of each economy. Many criteria can be employed do choose such a limit for countries to choose an optimum public debt to GDP ratio. For example the level of economic development of the country and the historical balance of its current its Current Account is important. It is also wise for countries to have the largest share of the public debt to be domestically owned. Also if foreign debt increases policy makers should assure themselves that such increase should result in a large increase in public investment and not public consumption.

best,

George Zestos

Debt is very much like pregnancy! It is big or small always in a context. Big economically powerful countries, with basic economic characteristics (size, production, national wealth, population, and a big GDP!) can always carry a high rate of indebtedness, and live with it for such time as the offshoots of this do not start impinging on a consistent and long tail of annual budget deficits that then will start feedibng ever more into the National Debt, such as will be making it, over the medium to long term, untenable.

To take the specific case of a small country like Malta. Up to say eight or ten years ago our National Debt to GDP ratio was hovering in the higher 80%s. In relation to our national economic fundamentals that was definitely a high ratio, even if, when compared to e.g. neighbours Italy, Greece, Spain, and elsewhere ours was at a lower numerical value.

With great public financial management Malta's National Debt now stands at around 40 to 45% of our national annual GDP. This is on a steadily downward trend, and may even go lower given that the economy is presently on a consistently high grow rate in the region of an annual 6 to 7% (net!), i.e. way above for example the current Eurozone average.

Your reference to foreign debt is of course also important. Malta's National Debt is, in its greater part, only domestically owned. Whenever government needs to borrow for its own PSBR, its issues of government stock or bonds are invariably taken up by local banks or citizens, because there is a lot of prudence and sense of savings ingrained in the national mindset, and so liquidity is quite available to government, to the banks, to investors.

In a nutshell the figure you mention - 50% - is neither here nor there...it must always be seen as relative to the context!

Dr. John Consiglio

Dept of Banking and Finanmce

The University of Malta

For a Developing Economy, this level is considered safe and reasonable.

As in most things in life....so with economics! It is all relative. There is nmothing magical about the figure of 50%! It all depends on sio many economic variables....such as:

- The economic findamentals of the country (size, population, location, natural products, etc)

- The size of a nation's GDP, calculated esopeially per capita....but not only

- How is GDP income spread amongst the nation.

- The nature and comoposition of the debt: e.g. is it domestically or foreign owned?

- The currency composition of the debt: is it debt owed in foreign currency or national currency (exchange risk can be a very costly affair to a country.)

And so on and so forth.

Regards.

Dr. John Consiglio

The University of Malta

NO AMOUNT OR RATIO may be considered bad so long as what is borrowed is treated as input, and the ouput (gdp) growth is large enough to repay what has been borrowed. It is the accummulation of debt paid for nonproductive activities, which does not lead to real gdp growth, that may cause problems. Public borrowing for infrastructural investment is always procductive.

I think there is a leverage effect, and no stability in the long term !!!!

I think, it totally depends on the nature of debt, size of economy and velocity of money.There is no fixed ruling for it but in my point of view, it should not become a Ponzi game.

Yes, I also believe that the prudential indicators themselves (e.g. in the formula of public debt to GDP) present an incomplete picture of the state of public finances of the state. In order to fully present the state of public finances, it is necessary to take into account many other macroeconomic factors, including the structure of the economy, the average level of profitability in individual sectors and branches, the pace of development, the share of investment expenditure incurred by the state finance system as compared to the entire state budget, the type of financial instruments used in servicing the debt of the state finance system, the level of investments in individual sectors and branches of the economy, the share of investments in modern technologies generating high profitability of new business ventures, the type of domestic and possibly foreign investors financing the redemption of debt instruments used in servicing the debt of the state finance system, the development potential of the economy and the level of GDP enabling effective public debt repayment, etc.

Best regards,

Dariusz Prokopowicz

Dear Dariusz Prokopowicz

I would like to add a few words about Ukraine's public debt to the discussion.

In recent years, the financial system of Ukraine suffered substantial losses as a result of which fiscal imbalances have increased, the banking system crisis has strengthened, public debt has significantly risen, leading to a decrease in the country’s solvency. The loss of a part of the state territories, the continuation of military actions caused a decrease in gross domestic product (GDP) growth, a decline in the export of goods and services and a balance of payments deterioration, an increase of debts guaranteed by the state for commercial enterprises, which are situated in occupied territories, etc. A significant threat for the financial sustainability of the state is to permanently exceed the limits of debt indicators envisaged in the current Ukrainian legislation (Art. 18 of the Budget Code of Ukraine stipulates the ratio between the general state debt indicator and the debt guaranteed by the state for the end of the fiscal period at the level up to 60% of annual nominal GDP). The reasons for this were as follows: an excess of public debt and the loans under the state guarantees over the amount of public debt repayments and debts guaranteed by the state; devaluation of the hryvnia to foreign currencies in which the debt is nominated; underperformances in funding the budget from public property privatisation; a negative influence of the systemic banking crisis of 2014–2016 and an increase in total state expenditures to overcome its consequences, which were at the level of 14% of GDP annually (according to the National Bank of Ukraine – NBU). The growth in government borrowing, carried out in connection with the banks’ capitalisation, significantly increased the state budget expenditures aimed at servicing the capitalisation domestic public debt, which reinforces the general tendency regarding the exacerbation of the budget risk in the debt sphere. A weighty debt-creating factor became the budget deficit, which was covered by borrowing.Despite the growth of public and state-guaranteed debt in absolute terms, its ratio to GDP decreased from 81% in 2016 to 62.7% in 2018 (according to NBU). Such a positive dynamic was not the result of a prudent fiscal policy of the Ukrainian government, but an outcome of a rapid increase in nominal GDP in the dollar equivalent under the conditions of macroeconomic stabilisation. Simultaneously, the safe (cut-off) level of debt has still not been reached, which enables the state to fulfil its debt obligations independently (without the assistance of international financial organisations or other entities), timely and in full, with-out resorting to the restructuration of these obligations or default announcing, and realise state borrowings at capital markets at affordable interest rates. The increase of the obligations’ share denominated in foreign currency or linked to the exchange rate in the overall debt structure as an important indicator of the financial system’s vulnerability to exchange rate fluctuations creates additional threats to debt sustain-ability regarding the increasing currency risk and the national currency devaluation.

Best wishes, Iryna Kondrat

GDP has for long not been considered as an "above all", or "perfect", economic indicator. It hides too many things in an economy, especially HOW such gross domestic (or for that matter even "national", i.e. from external sources) is sourced and distributed. Its accounting is flawed in that it, inter alia, fails top take account of production the benefit of which is spread over more than the basic accounting year. And there are several other failings in GDP....

Dr. John Consiglio

Dept of Banking and Finance,

The University of Malta

Dear Iryna Kondrat,

Thank you very much for explaining the specificity of the debt of the state finance system on the example of your country. I notice many analogies with the situation in the country where I operate. Indeed, a relatively high level of public debt poses a threat to the stability of state finances, is associated with an increased risk of a financial crisis and imposing further tax burdens on citizens, and slower economic development due to lower investment expenditure.

Best regards,

Dariusz Prokopowicz

Dear J.A. Consiglio,

That's right. GDP is not a perfect indicator, it has many drawbacks. It does not take into account many different external aspects of business activity, it does not take into account non-accounting costs that will appear only in the following years. It does not take into account many aspects of the shadow economy, i.e. economic activity not shown in any record system, etc. Moreover, comparing the amount of GDP for different countries on an international scale is burdened with a large error, because in the detailed formulas for constructing and calculating GDP in individual countries it is not fully identical.

Best regards,

Dariusz Prokopowicz

It generates high risks if the debt is directed towards current spending, but the risks are low if it is directed towards investment spending.

Again the answer must be “depends”.....depends on a wide range of ad hoc factors that would be the characteristics of any particular country.

it is silly to think of the debt problems, however potentially big to itself and its own economic fundamentals, of a very small country to be such as potentially causing a world debt crisis!

But it is a very different situation where “big” and permanently big indebtedness becomes the characteristic of a large nation like, say, the United States.

Such a debt has a potentially destabilizing effect on the economic operating of such a big country.

This is indeed the stuff of a potentially long explanatorg discourse and can hardly be fully explained in a mobile phone message!

Dr John Consiglio

The University of Malta

Dear Fahad Mghemish Huzayran,

Yes, I fully agree. Unfortunately, currently in many countries most of the public sector expenditure, including state budget expenditure, is allocated to the implementation of short-term and current objectives, maintaining the current continuity of the operation of public institutions, maintaining current liquidity, etc. profitable investment projects in the future, etc.

Best regards,

Dariusz Prokopowicz

Dear J.A. Consiglio,

I agree with your view of this problem. Of course, a complete, objective assessment of the debt level of the state finance system cannot be based solely or mainly on the prudential indicators themselves, but should take into account various factors describing the state, structure, specificity of the national economy, the level of investments, profitability in individual sectors and branches of the economy, etc. and the relations economic and financial with other countries, international financial institutions, etc.

Best regards,

Dariusz Prokopowicz

The literature, both academic and popular (newspapers, social media, etc) on this topic has now accumulated quite a lot over this decade, and any researcher seeking to study it all and put it all together should never feel downhearted. I wish you well in your work.

God bless you all.

Dr. John Consiglio

The University of Malta.

Dear J.A. Consiglio, Yes, that's right, the literature on this topic is rich. There are many concepts and proposals for various strategies of public finances of the state, financing of public debt in the context of conducting a specific budget and fiscal policy, etc. On the other hand, in some countries the issue of the maximum permissible level of indebtedness of the public finance system of the state is determined by legal norms, including the Act essential, i.e. in the Constitution. In this way, the instrument of security of the state's public finances is established. However, it is usually the level of public debt that amounts to 50%. GDP. whether it is a safe level or not, it is conditioned by many macroeconomic factors describing the functioning of a specific national economy against the backdrop of the global economic situation, etc.

Greetings,

Dariusz Prokopowicz

Dear friends, I want to attract attention to the changing economic situation worldwide - before COVID-19 crisis 50 % of debt to Gross Domestic Product was a high public debt for many countries, but nowadays, during coronavirus crisis, and I think, for some time after it, 50 % of country's debt risk can be considered as rather low.

The question mentions the figure 50%....but I will ask why 50%....and not 49% 0r 51%, or 100%, or whatever figure one may wish to insert into the question? We all know that there are different countries in the world with different ratios of Public Debt to GDP. I have aklready answered about the big illogicities in using GDP as one of the major variables for measuring the strength of a country's public finances....that's insofar as concerns the denominator of the formula....

So, coming back to this fatidical 50% the simple answer is "It all depends"....and this dependency is on a multitude of factors, in some of which some countries may be strong and others will be abysimically weak....things such as:

- Underlying natural economic attributes, e.g. demography, natural resources, geographical; position, etc

- The country's trading relationships, i.e. import and export levels,

- The country's financial reserves,

- The country's polituical and intellectual assets,...

and so many iothers.

Some countries (Italy, France, the US, and indeed several others have had Public Debt to GDP ratyios of well over 100% for ages...and yet have survived....others with lower levels have gone into disastruous situations of bailouts, severe austerity measures, and even high societal riots and other forms of governance disasters.

And still others have been absoklutely economic success stories...I always like to mention my own country's (Malta) reality since 2013 when from the then Public Debt to GDP ratio of over 80%, this has now been brought down in the post 2018 years to some 40 to 45% level....even if now, with the current COVID-19 pandemic it has again gone up to some 60%.

So, to conclude this is a very open-ended question and there is no one simple, yes or no, answer.

Dr. John Consiglio

Faculty of Economics, Management, and Accountancy,

The University of Malta.

It depends on the corresponding public assets; the sustainability conditions (related to nominal growth, interest rates, debt maturity, etc.); the indebtness of private sector (in general a single large state guaranteed debt is less costly than a large number of small private liabilities).

Another important factor which I forgot to mention in my previous contribution is to whom is the Public Debt owed. It is obvious that if the bulk of a nation's Public Debt is only owed to its own citizens, and hence one also presumes would be in that country's currency, then that would be a totally different situation to a big Public Debt thde bulk of which is owed to foreign citizens, institutions, or countries, and probably also due not in the borrowing country's currency.

To the above must also be added the actual repayment terms, including time and interest rate factors, of the Debt....

So yes these too are elements which impinge on whether a public debt is "big", or "small", "good", or "bad"....or whatever.

Dr. John Consiglio